EUR/USD Forecast May 5-9

EUR/USD traded in range throughout the week. Its dips to the downside resulted in quick bounces. The big event of the upcoming week is the rate decision: will Draghi make a bold move? Apart from that, we have services PMIs and a few important German figures. Here is an outlook on the highlights of this week and an updated technical analysis for EUR/USD.

Euro-zone inflation rose to 0.7% and core inflation to 1% in the initial data for April. These are still low levels, but perhaps not ones that will force the ECB to act. Draghi’s dilemma is becoming more complicated and the uncertainty towards the decision is growing. In the US, Q1 growth was quite poor, but data for April already looks positive. The strong NFP report helped the dollar only temporarily.

Updates:

• May 5, 16:00: ISM Non-Manufacturing PMI 55.2 in April – better than expected: ISM Non-Manufacturing PMI at 55.2 points on April 2014. The US economy continues growing steadily according this number. The ISM Non-Manufacturing purchasing managers’...
• May 5, 8:20: EURUSD: Bear Threats Not Over Quite Yet: EURUSD: Our bias on EUR continues to point lower while holding below the 1.3905 level. Though closing marginally higher the...

EUR/USD daily chart with support and resistance lines on it. Click to enlarge:

1. Sentix Investor Confidence: Monday, 8:30. The Eurozone’s broad based Investor Confidence survey climbed 0.2 points in April to 14.1 in line with market consensus. Sentiment remained fairly positive about the Eurozone economy. The strength of the euro and the lack of inflation as well as the uncertainty around the global economic recovery and the slow-down in China did not discourage responders. Investor Confidence is expected to rise to 14.2 this time.
2. EU Economic Forecasts: Wednesday, 9:00. EU commissioner Olli Rehn announced at the winter economic forecast in February, that the Eurozone’s recovery is gaining ground. Rehn showed higher than expected growth rates and forecasted a 1.2% expansion this year and 1.8% in 2015. However, the unemployment rate remained the biggest downside risk to the Euro-area recovery.
3. Spanish Unemployment Change: Tuesday, 7:00. The number of job seekers in Spain dropped by 16,620 in March following a 1,900 decline in the previous month. The reading was much better than the 5,300 drop estimated by analysts. Over the last 12 months, the number of unemployed has fallen by 239,377. However, the unemployment rate continued to climb despite recovery signs, rising to 25.9% in the first three months of 2014 compared to 25.7 in the final quarter of 2013. The number of job seekers is expected to decline further by 49,000.
4. Services PMI’s: Tuesday. Spanish services sector surprised markets with a better than expected release of 54.0 points compared to 53.7 in February, strengthening business investor sentiment about a possible pick-up in economic activity. Meanwhile, Italian services sector contracted in March with a 49.5 reading after expanding to 52.9 in the prior month. The reading was lower than the 52.3 points forecast indicating sluggish recovery. The Eurozone final Services PMI declined slightly to 52.2 from 52.4 in February, still remaining in positive territory. Spanish services is expected to reach 54. Italian services are predicted to reach 51.2 and the Eurozone services is expected to reach 53.1.
5. Retail Sales: Tuesday, 9:00. Eurozone retail sales edged up 0.4% in February beating forecasts for a 0.3% decline. The rise was attributed to a 0.8% climb in the non-food sector and 0.3% growth in food, drinks and tobacco, while automotive fuel fell by 0.8%. On a yearly base, growth reached 0.8% in line with market consensus. Eurozone retail sales is expected to drop 0.2%.
6. German Factory Orders: Wednesday, 6:00. Germany’s factory orders expanded more than expected on February advancing 0.6% compared to a mild 0.1% growth in the previous month. Economists expected orders to grow by 0.5% in February. Domestic orders increased by 1.2%, while foreign orders advanced slightly by 0.2%. Furthermore, new orders from the euro area edged up 5.9%, while new orders from other countries declined 3.1%. Overall Germany continues to strengthen. A rise of 0.3% is expected now.
7. French Industrial Production: Wednesday, 6:45. French industrial output increased by 0.1% after a 0.3% decline in January. Gains were registered in all sectors except for energy refining. However the rise was smaller than the 0.2% increase anticipated by economists. The Bank of France stated that manufacturing output advanced in March and will continue to expand in April. French industrial output is expected to rise by 0.3%.
8. Retail PMI: Wednesday, 8:10. The Retail Purchase Managers Index (PMI) for the Eurozone remained in contraction, posting 49.2 points in March compared to 48.5 in February. However the release was close to the 50 point line separates expansion from contraction. Businesses were the most optimistic about their future performance suggesting the worst is over.
9. German Industrial Production: Thursday, 6:00. German industrial production continued to expand in February rising 0.4% after posting a 0.7% increase in January. This was the fourth consecutive month of increase indicating a pickup in Europe’s biggest economy. Germany’s factory order are also encouraging, rising 0.6% in February. In light of these positive figures, the German government raised its 2014 growth forecast to 1.9% from 1.6%. A rise of 0.2% is anticipated.
10. Rate decision: Thursday, 11:45.  The European Central Bank decided to leave interest rates at a minimum low of 0.25%. A sharp drop in inflation posted in March and April generated expectations for further monetary easing, but the vast majority of voters decided to keep monetary policy intact. However, ECB President Mario Draghi stated that the ECB is ready to act with further forward guidance in case of further worsening. The ECB is expected to maintain rates despite the low inflation trend.
11. German Trade Balance: Friday, 6:00. Germany’s trade surplus narrowed unexpectedly in February to 15.7 billion euros from 17.2 billion euros amid a 1.3% decline in exports. Meanwhile imports increased slightly by 0.4%. Germany was criticized for relying too much on exports and not importing enough to boost other European economies. However, the major surplus derived from countries outside the European Union. Chancellor Angela Merkel told lawmakers Wednesday Germany’s exports are healthy “but the domestic economy is contributing more to growth than in past years.” Germany’s trade surplus is expected to grow to 16. billion.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar began the week with slow range trading. A move below support at 1.3785 proved to be short lived and a false break. They were followed by a big bounce that met eventually met resistance under 1.3905 (mentioned last week). A second dip down was also followed by a bounce.

Technical lines from top to bottom:

1.4105 provided support for the pair during August 2011. It is followed by 1.4055, which worked as a lower line in that period of time.

The all important round number of 1.40 is of high political importance. We have seen how getting close to the line triggered a critical comment that sent it down. Below, the 2014 high of 1.3964 will be closely watched.

The April peak of 1.3905 serves as minor resistance. It is followed by 1.3865 which capped the pair during the same time as well.

1.3830, which was a long serving 2013 peak comes back into the focus after capping the pair in March 2014 and serving as a clear separator several times. 1.3785 worked as support for the pair during April and served as resistance beforehand.

1.3740, which provided some support at the end of 2013 is now key support to the downside. The round number of 1.37, is another support line after capping the pair in December.

1.3650 provided support in December and worked as resistance in September 2013, and is also a significant line. Also the February rally fell short of this line. Below, 1.3560 worked as good support twice during February 2014.

The January 2014 low of 1.3515 provides minor support on the way down. 1.3450 worked as resistance in August 2013 and as support in September and October. It is now a key line on the downside.

I am bearish on EUR/USD

The exchange rate is certainly troubling Draghi and co., and their louder and louder complaints are falling on deaf eared markets. EUR/USD is too close to 1.40 and inflation is still low after April’s “dead cat bounce”. Refraining from action can carry the pair above the closely watched round number of 1.40.

In the US, job growth is certainly encouraging despite the lack of wage growth in April. The narrative of a “spring bounce” after a harsh winter is gaining traction. A steady dollar will leave the show to Draghi.